Please note: This update was prepared on Friday, March 13, 2020, before the market’s close.
This week, we saw panic supersede fear. Thursday saw the worst one-day decline in the Dow Jones Industrial Average—a 10.0% drop—since 1987’s one-day market crash. Markets were rebounding modestly as we were preparing this update, but we expect volatility to be the norm in the weeks ahead.
The reason for the panic is clear: Projected social and economic impact of the spreading coronavirus was the main catalyst; it has been abetted by a sudden Saudi-Russian oil price war that drove oil’s price down more than 24% to near $30 a barrel. But panic is not a plan nor an investment discipline—and we will make investment decisions in our experienced and reasoned manner.
As we mentioned in our update yesterday, it’s important to remember that it’s fear and uncertainty driving investment markets down this week, not clear data and a reasoned assessment of the state of our economy or corporate balance sheets. Indiscriminate selling is a hallmark of panicked traders—but a well from which disciplined investors like us can draw long-term gains.
Considering what we know, a recession here seems all but certain, but it’s not yet possible to predict the extent and duration of the coronavirus’ societal or economic damage, making it impossible to judge how deep or shallow a recession might be.
The good news is that no pandemic in history, however dire, has lasted forever. With that in mind, we continue to stay the course, hewing to the portfolio strategies we’ve implemented on your behalf. That doesn’t mean, however, that we are standing still. Our tactical strategies have been reading and reacting to the market’s signals for the past several weeks, and have already begun to take a more defensive posture. You can expect to see some trades in your accounts in the weeks ahead as we scrutinize every component of your portfolio with an eye to what has occurred in the markets to date as well as how we see the future unfolding.
Panic is not a plan nor an investment discipline—and we will make investment decisions in our experienced and reasoned manner.
As advisers and wealth managers, we have decades of experience as fiduciary stewards of your hard-won savings and long-term investments. And we are in this together. Members at every level of the Adviser Investments family are invested alongside you in the very same funds, relying on the very same strategies you do to meet our own long-term investment objectives.
The recent market decline means at least some, perhaps too much, of the negative impact of the virus is being priced in. Even if hindsight reveals that traders have already overreacted, that doesn’t mean they won’t continue to overreact over the near term, particularly if the pandemic worsens and social distancing remains the sole solution to combat it. Our hope is that there will be quick, decisive and concerted moves taken by the Federal Reserve, the central banks and other policymakers here at home and globally to provide access to medical care, fiscal support for those most in need and, ultimately, to calm investment markets. In their absence, we expect that day-to-day turbulence will continue to roil Wall Street in the coming weeks.
For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index have fallen 25.3% and 22.9%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 26.5%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has risen to 1.80% from 1.50% last week, down from 2.31% at 2019’s end. On a total return basis, the U.S. bond market has gained 3.0% for the year.
Bear Markets Are Temporary
The bear market is here, and it came in with a roar. In just 16 trading days, the S&P 500 Index went from setting a record high to falling more than 20%—meeting the popular definition of an ursine upset.
It’s always wise to put the market’s moves, particularly the big ones, into perspective. Our research team took a look at the last 20 trading days through Thursday, representing approximately one month’s worth of trades. Over that period the S&P 500 index declined 26.6%. That’s the eighth-worst 20-day run, out of 15,846 since the S&P’s 1957 inception. Only the aftermath of Lehman’s bankruptcy in September 2008 or 1987’s Black Monday are comparable.
As dramatic and fast as these declines have been, the market has always recovered from them; it just takes a little time.
As you can see from the table above, even after the worst declines, the market has typically climbed back quickly—on average, stocks are up more than 19% from their bottom just 12 months after a shock like the one we experienced this week, rare as they are.
Over the last 63 years, the S&P 500 has compounded at a 6.6% annual rate—that includes the current bear market but doesn’t count dividends. That means, before dividends, stocks have doubled every 10 years or so. The “price” of that compounding opportunity is that investors have to suffer through bear markets from time to time. Despite the occasional painful downturns, stocks remain the single best asset for compounding your wealth over the long-term. Careful attention to the market’s signals can enable investors like us to avoid the worst drawdowns, but it’s never our plan to stay out forever and miss out on the rebound.
Special Podcast: Coronavirus and Your Portfolio
We’ve just been through two very unsettling weeks, both from a world health perspective and as investors. Given the unknown scale, duration and toll of the pandemic, it’s understandable to be fearful.
In this timely podcast, Chief Investment Officer Jim Lowell, Director of Research Jeff DeMaso and Vice President Steve Johnson discuss what’s changed since the markets were trading at new highs less than a month ago. How are they seeing the coronavirus in the context of markets and the economy?
How bonds have been working as expected in diversified portfolios
The role of dividend-paying stocks when bond yields are low
The economic impact of an oil-price shock on top of virus unknowns
The opportunities they are seeing the markets today
Fear tends to fill the vacuum when information is scarce. But fear-based portfolio moves can do more harm than good. To learn more about how our team views investing during a crisis, click to listen now.
This Time Is Different
We haven’t seen much good news on the financial pages these days, and it’s natural for investors to be worried. Market drops like the ones we’ve experienced this week can’t help but remind many investors of the Financial Crisis of 2008, when stocks fell 50% before rebounding for a decade-long bull run.
But the good news is that this is not a repeat of 2008: This time truly is different.
The U.S. is not facing a financial crisis. Banks remain strong, in part because of changes made after the 2008–2009 rout. Our health care industry is both healthy and innovative. Unemployment remains low, though we recognize that this will change as businesses either close or curtail their hours and consumers stay home rather than venturing out to shop, to dine and to be entertained. The travel industry is being particularly hard-hit right now, but even the most downtrodden sectors (airlines, travel and leisure) will eventually soar when the crisis is past. The energy sector is a wild card—yet while oil companies may suffer, lower gas prices are a tangible boost to consumers’ wallets.
The current crisis is already revealing some potential long-term opportunities. For instance, the need for companies to maintain business continuity will be a boon for the technology industry. And more robust and diversified supply chains, spreading demand through more parts of the globe could be another result of companies looking to bolster operational continuity.
The market’s fall this week has been shocking because it was so abrupt. If there’s one thing that history teaches us, it’s that sharp falls often reverse swiftly, too (as shown above)—though it can take quite some time to climb back to old peaks.
In the meantime, as investors with long-term perspectives, we should all have what some dismissively refer to as “rainy day” money—savings we should all have held aside for emergencies that can be personal or structural. Well, this is a structural emergency and that’s what those savings are for. If we’ve done our homework correctly, we aren’t tapping those portfolios right now for our day-to-day expenses.
In sum, this remarkable period of social and market upheaval shall pass. In the meantime, our (virtual) doors and our phone lines remain open for business.
Financial Planning Focus
Financial Planning in Volatile Times
General financial planning wisdom says that it’s important to “stay the course” during times of market volatility. But keeping the tiller steady is a lot easier said than done in stormy markets like the ones we’ve experienced in recent weeks. Here are four tips to help you to steer straight and stay afloat when the markets are roiled.
Review your goals. If the life events you’re planning for are 10-plus years away, a sequence of down days in the market is unlikely to imperil your ability to reach your goals. But pulling your investments out of the market during times of distress could. Shorter-term goals are a slightly different story. If you have funds you expect to need in the next year or so, that money is typically best held in cash so that it isn’t affected by the whims of the stock market’s day-to-day moves.
Keep your emergency fund robust. No matter what your financial goals are, it’s important that you’ve got enough rainy-day savings to weather an unexpected situation. Your emergency funds should never be invested in the stock market. We recommend a simple checking account with your local bank or even a money market account with check-writing privileges.
Diversify. Nobody knows which way the market is going to turn from day to day. That’s why effective portfolio diversification is your best friend when it comes to warding off the inevitable ups and downs of the stock market. At Adviser Investments, we believe that a well-diversified portfolio made up of domestic and international stocks as well as a broad swath of bonds, depending on your goals and risk tolerance, helps smooth the ride when markets get choppy.
Talk to your adviser. Stock market drops aren’t easy to take no matter how experienced an investor you are. Fear is a strong emotion. That’s where we come in as advisers. Our experienced team of portfolio executives have helped hundreds of clients to position their portfolios to for perform well through some of the most dramatic market corrections in history. Please don’t hesitate to reach out during periods of volatility such as this.
One final thing to keep in mind: Even the worst market storms don’t last forever. Please give your adviser a call to get their perspective on the situation (for example, if you’ve been considering converting your traditional IRA to a Roth IRA, this could be good time to save on the taxable gains generated by the move). Our experience shows that bear markets are often viewed as scary and heart-stopping when they occur but when they are finally in the rear-view mirror they are seen as opportunities.
Please call us if you are uncertain about your portfolio positioning or if you’d simply like to talk. We stand ready to answer any and all of your questions and concerns.
Adviser Investments’ Response Plan in Action
Here at Adviser Investments, we too are taking steps to do our part to prevent the virus’ spread. As a company, we have long been prepared for just such an emergency, and are implementing those plans now, as needed.
We remain open for business, and all of our day-to-day operations are carrying on as normal. We have had an off-site action plan in place for years (and we’ve been reviewing and updating it each year)—allowing us to work from home at a moment’s notice and continue to meet our clients’ needs.
Whether we are in the office or in our homes, we are here to take your calls, respond to your emails and provide the investment counsel that you’ve come to expect.
We are carefully monitoring and following instructions from our local health officials as to how to best combat the virus, and will update you if our procedures change.
Most of the typical economic reports due out next week—including reads on housing, job openings, and retail sales—are based on data from February, and the quick-moving nature of the coronavirus’ spread means that they will offer little insight into the economy’s current state. Weekly jobless claims, due on Thursday, could provide some indication of how voluntary closures are affecting businesses, and we will of course be eagerly awaiting further remarks from Fed Chair Jerome Powell, who is scheduled to speak to the press Wednesday (if not before).
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, March 13, 2020, before the market’s close.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.